Yes, Paul: It is Hayek versus Keynes

by Mario Rizzo

Although by the standards of contemporary economics, I am a historian of economic thought, I am not a historian of economic thought, properly considered. Thus my major interest in F.A. Hayek’s business cycle theory is not from the point of view of a historian. My interest is only incidentally in how Hayek’s contributions were perceived in the 1930s and 1940s, especially in light of John Maynard Keynes’s Treatise on Money and General Theory.

I am interested in Hayek’s business cycle theory because I believe it has much to teach us today – both in the style of reasoning it embodies and for its substantive points. Of course this is not to say that Hayek’s approach cannot be improved upon and revised in light of more recent theoretical and empirical developments.

But now comes Paul Krugman with his sometimes-echo Brad Delong (or is it vice versa?). Krugman thinks that Hayek was not an important “macro” economist; certainly not the rival or alternative to Keynes, either in the 1930s or today. 

Chicago and Vienna

by Jerry O’Driscoll

In the last two days, two prominent economists have asked me essentially the same question: what is the difference between Chicago and Austrian economics? It is interesting that both asked, particularly since one has a Ph.D from Chicago.

The second economist asked me specifically if Armen Alchian wasn’t really an Austrian. I’ll respond as I did to him. I learned most of my Austrian economics in the UCLA graduate economics program. (At that time, UCLA was known as Chicago West.) I was never an Alchian student, but one read lots of Alchian anyway. And his influence pervaded the department. It was obvious to me that Mises had influenced Alchian. Also Hayek, as is made clear in a video of Alchian interviewing Hayek.

Hayek’s classic essays on prices and information were on various reading lists at UCLA.

The Rule of Discretion versus the Rule of Law: Soros Gets Nailed

by Mario Rizzo

In a previous post I reported a Cato Institute panel discussion of Friedrich Hayek’s The Constitution of Liberty (as reissued in a new edition by The University of Chicago Press). This discussion was among Bruce Caldwell (Duke University), Ronald Hamowy (Cato and the University of Alberta), Richard Epstein (New York University), and George Soros, the mega-financier.

In this discussion, ostensibly about the rule of law, Soros said that the complexities of the financial sector require a new class of regulations that may not be simple, predictable and transparent. They may require considerable discretion on the part of regulators. This is because financial markets are the locus of radical uncertainty. It is thus impossible to predict beforehand the kinds of financial-instrument developments that will occur and, especially, the consequences these will have. Thus the financial regulations must be able to be creative in dealing with such developments. This apparently means the rule of law in its traditional sense will have to be bent or compromised.

Another step down the road to serfdom

by Roger Koppl

Peter Orszag, former director of the Office of Management and Budget, has written an article for The New Republic entitled “Too Much of a Good Thing: Why we need less democracy.”  “To solve the serious problems facing our country,” he says, “we need to minimize the harm from legislative inertia by relying more on automatic policies and depoliticized commissions for certain policy decisions. In other words, radical as it sounds, we need to counter the gridlock of our political institutions by making them a bit less democratic.”

Monetary Nationalism

by Jerry O’Driscoll

I recently read Money, Markets and Sovereignty by Benn Steil and Manuel Hinds. I highly recommend it. The jacket blurb accurately summarizes the book’s importance: “Benn Steil and Manuel Hinds offer the most powerful defense of economic liberalism since F. A. Hayek published The Road to Serfdom more than sixty years ago.”

Steil and Hinds focus on the institutional underpinnings of liberalism: the rule of law, globalization (free trade and free movement of capital) and commodity money. Their arguments on all points are powerful. Their argument on money runs against the grain of modern monetary theory. They rely heavily on history to buttress their arguments.

Reading the book motivated me to reread Hayek’s Monetary Nationalism and International Stability, upon which a good part of their monetary analysis is based. Though written in 1937, the book makes a powerful argument against the international monetary arrangements of the last 40 years: the 182 national fiat currencies.

Hayek argues the benefits of national fiat currency are largely illusory, and fiat money introduces problems unknown under the gold standard. For instance, Hayek, and Steil and Hinds explain why short-run capital flows can be destabilizing in a fiat money system, while they are stabilizing in a commodity standard. The two works follow the Misesian strategy of criticizing policies (or institutions) by demonstrating that they produce results different from or even the opposite of those intended by their advocates.

This year’s Cato monetary conference (November 16, 2011) will focus on monetary reform. Instead of a keynote address by a senior Fed official (a hallmark of past conferences), the opening address will be by Ron Paul. Panel I will be “Rethinking the Global Fiat Money System.” Chaired by Mary O’Grady of the Wall Street Journal, the panel will consist of Benn Steil, George Melloan and myself.

The Führer Principle – Light

by Mario Rizzo

David Gergen has written a piece decrying the lack of leadership on the debt-deficit “crisis” and calling for a new Churchill. David Gergen, who saw no problem working for both Ronald Reagan and Bill Clinton, now teaches at the JFK School of Government at Harvard. He has a claim to being a member of the political establishment if anyone has.

This call is not confined to Gergen, however. It appears as a widely agreed-upon diagnosis in the news media, whether old or new. It is the conventional wisdom of the day.

Yet it is dangerously superficial. It completely misdiagnoses the problem before us.

Moral Trial and Error

by Mario Rizzo

The recent discussion-thread at the blog Coordination Problem regarding a Hayekian case for same-sex marriage got me thinking more generally about moral evolution.

In a market there is a process of trial and error. New products or methods of production come into existence. Some fail; others succeed. Some speculators make successful predictions of the future course of prices; others make mistakes. In general, the filter for these decisions is the profit and loss mechanism.

F.A. Hayek famously argued that the evolution of institutions, including moral and legal rules, follows a similar course, that is, trial and error. And yet the analogy with market processes is far from perfect. How do we view the trial and error process of moral rules? What is the filtering mechanism?

Right off, let me say that I do not have definite answers to these questions. I simply have some relevant thoughts.

David Hume and Friedrich Hayek: Classical Liberal Giants

by Mario Rizzo

I have just discovered the wonderful coincidence that May 7th is David Hume’s birthday and May 8th, as I have known, is Friedrich Hayek’s birthday. It is Hume’s 300th birthday – how amazing that he is still so relevant in a myriad of ways. It is Hayek’s 112th birthday.

As most of our readers will know, Hayek thought that David Hume’s political philosophy was one of the most important intellectual developments in the classical liberal heritage. David Hume was also a source of inspiration for the work of James Buchanan and his schools of public choice economics and constitutional political economy.

The Wal-mart Solution

by Jerry O’Driscoll

Who should provide disaster relief? Who does provide disaster relief? In the Weekend Wall Street Journal, David Beito of the University of Alabama provides the answer for the victims of the devastating tornado in Tuscaloosa: it’s Wal-mart, churches, students, private individuals and, critically, talk radio.

The four Tuscaloosa Clear Channel stations organized a wholly voluntary relief effort. Beito recounts how, instead of taking Spring break, “students in the Greek system at the University of Alabama and historically black Stillman College stayed to cook more 7,000 meals per day.” The radio stations take calls from individuals in need and broadcast what is needed, by whom and where. Sometimes within minutes volunteer assistance arrives.

George Soros, F.A. Hayek, and The Constitution of Liberty

by Mario Rizzo

I think George Soros is a good man. To me he seems like a person who wants to make the world a better place. He, like Keynes, is against comprehensive economic planning (ambiguities about “planning” noted) but thinks that financial markets are inherently unstable and thus must be regulated by a nimble or flexible regulator.

I was at a forum last Thursday at the Cato Institute in Washington, DC in which Ronald Hamowy, Bruce Caldwell, Richard Epstein, and George Soros ostensibly discussed F.A. Hayek’s The Constitution of Liberty (the new, definitive edition). This post is not meant as a report of the event. I am not a reporter. However, I want to focus on a number of points that Soros made about Hayek’s views. I hope this will clarify some sources of misunderstanding about Hayek that may be quite common in some quarters.